You are the International Business Manager at a UK-based company. Your company has identified the USA and

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Question:

You are the International Business Manager at a UK-based company. Your company has identified the USA and Europe as potential markets and wishes to expand ASAP and plans a full-scale expansion. You are requested to analyze both projects and advise.

In considering such a large project, you must work out the risk of each project, cost of capital (Hint: you can use prevailing interest rates and inflation in each region to base your calculation) and calculate NPV. Allocate the discount rate for each project according to the current international business climate and justify why you allocated the discount rate for each region. Discuss how you aim to manage international risks.

Projected cash flows in respective currencies:

Year Net Cash Flow – USA USD Net Cash Flow - Europe EUR

0 -20 million -20 million

1 2 million 2 million

2 4 million 3 million

3 5 million 4 million

4 6 million 8 million

5 8 million 8 million

Task:

a. Briefly discuss the viability of both projects in today’s global business context. Based on your discussion allocate and justify the discount rate for both projects.

b. How much investment (GBP) is needed for each project and what is the NPV of each project? Use spot and forward exchange rates to discuss.

c. Considering the current world economic climate, the future exchange rates are uncertain. How would you analyze/anticipate the change in exchange rates? Write a brief proposal to mitigate the impact of possible exchange rate fluctuations

d. Discuss your calculations and advise which project should be selected.